Manufacturing Account: Prime Cost ( Part 1)

October 16th, 2006 Comments off
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An enterprise can buy goods from others for resale and or it can manufacture its own goods for resale.

 

When the enterprise manufactures its own goods, it keeps such records that will disclose his TOTAL COST OF MANUFACTURE/PRODUCTION. At the end of an accounting period, a Manufacturing Account is drawn up to ascertain the total cost of manufacture. Sometimes, it is so prepared as to show whether the factory has made a manufacturing profit or loss.

 

 

For a Manufacturer:

Cost of Production = Prime Costs + Factory Overheads

Prime Costs are direct costs of a product before any manufacturing overhead is added which consists of:

  • Direct raw materials;
  • Direct labor and
  • Direct expense

Direct raw materials:

Normally, direct raw materials form a major portion of the prime costs;

Consist of Cost of Purchase and All costs incurred in getting the raw materials to the factory;

Formula to get

Cost of raw materials used/consumed :

= Opening Stock of raw materials

Plus: Purchases of raw materials

Plus : Carriage Inwards

Plus:  Duty charges

Less: Closing Stock

Direct Labor:

Cost of labor that can be traced directly to the manufactured goods. Example is the wages for the factory operators

Direct Expenses:

All expenses that can be directly related to the production process.

 

Illustration To Determine Prime Cost:

Details of a manufacturer for year ended 31 st Dec:

 

Purchases of raw materials                    $ 4,000

Opening stock of raw materials                  $200

Closing stock of raw materials                   $400

Freight charges on raw materials                $150

Direct wages                                          $1,500

Direct expense                                         $600

 

Calculate the prime cost.

 

Statement Of Prime Cost for the year ended 31 st Dec

 

Opening stock of raw materials $200

 

Purchases of raw materials $4,000

Add: Freight $150

$4,150

$4,350

 

Less: Closing stock of raw materials ($400)

Cost of raw materials used/consumed $3,950

Direct wages $1,500

Direct expense $600

 

Prime Cost $ 6,050

 

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Financial Accounting

 
 

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